But I would not care to place any expensive bets on the proposition that such drastic measures will less harmful to the domestic German economy than a transfer union. You'd be trading a harmless fix for a harmful one to avoid offending the eccentricities of a handful of Hayekian preacher men in the Bundesbank.

In Germany, some media were already decrying the "death" of the Bundesbank after it failed to prevent the plan while some analysts said the ECB was taking on a role closer to that of the US Federal Reserve.

Well like I always said: The Bundesbank hasn't existed since 1999. All that is left is a branch office of the ECB that keeps the name of Bundesbank for traditions sake. And the director of this branch office has only one vote at the governing council of the ECB and can easily voted down.

But everybody always shouted at me that this isn't so and that the Bundesbank has as a part of an ancient conspiracy super secret powers and can somehow control the ECB by raising its brow.

This hasn't and doesn't prevent the BuBa from communicating non-stop its opinions on what the ECB ("independent" central bank) should or shouldn't be doing, while we hear from the other central banks of the Euro system much less often and much more discreetly.

Perhaps someone should inform the BuBa that it no longer has any importance and should shut up?

If you imagine that communications have no influence on real events, and that the BuBa's communications have not been responsible (jointly with the press) for building a state of German public opinion that may yet prove an insuperable obstacle to either the development of a genuinely workable single currency or to a peaceable and cooperative return to national currencies, you are smoking the wrong stuff.

Well, there's the decision of the German Constitutional Court, which might yet kill the ESM and with it the ECB's policy announced yesterday:

54% of Germans want the Constitutional Court to say No

Most commentators are heavily discounting a Yes, or Yes but vote by Germany's Constitutional Court on the ESM next week. Spiegel Online reports of a poll showing that 54% of Germans want the court to say No. Only 25% want the Court to reject the case. The poll shows that the German public has become increasingly hostile (a sentiment no doubt whipped by the Bundesbank and comments such as those above.) 53% are against transferring further competences to the EU, while 43% want Greece out of the eurozone. Der Spiegel made the point that a No vote by the Constitutional Court would also automatically killed off Draghi's OMT.

In another article, Spiegel reports on the political reaction to the decision. Most of it is unremarkable. But we were struck by a comment from Jurgen Trittin, head of the Greens in the parliament, who said that the OMT would greatly increase the risk that Germany's ESM contribution and credit guaranties would be defaulted on. He said by refusing eurobonds, Angela Merkel has forced the ECB to monetise debt through the backdoor.

The Court will have to adjudicate between the Bundesbank and its fans, and the German industry which has finally come out in support of the Euro. And, of course, Merkel has hedged her bets by supporting Weidmann publicly and having her man Asmussen support Draghi, so she will come out on top in any case. I suspect that Schäuble will burn out of this one, too.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

The requests are directed to ban the President from signing the laws adopted by the Bundestag and the Bundesrat on the 29th of June 2012 as measures to tackle the sovereign debt crisis in the euro area until the decision on the particular main decision.

The court will either decide the law can be put in force or it will decide there must be a ruling in the matter (next year or so). I find the former is more likely. The court will NOT decide on the constitutionality next week.

Unless some sort of loophole is found, yes. The court is aware of that, though. I don't believe they will decide on (another) stay. And that means Merkel's strategy of postponing a decision until it is too late for a meaningful debate will have won again.

Easy. As a social democrat Asmussen gets his marching orders out of the Willy Brandt-Haus.

Seriously:

I think Asmussen is because of his long career inside the finance ministry more used to public diplomacy and the necessity of compromise. He is also used to support his boss in public, in this case Draghi.

Weidmann is more a product of the absolute and irresponsible Bundesbank culture.

At the press conference, Draghi said that one member vote No - no prizes for guessing who. Draghi said different central banks expressed different views, but all converged to this policy. As reported by Frankfurter Allgemeine and others, a Bundesbank spokesman quoted him as saying that he rejected the OMT on the grounds that it was too close to monetary financing, and that they would risks for taxpayers.

The FT's editorial headline says: Mr Draghi's audacious gamble. The comment said that the SMP fell short for technical reasons, which the OMT has fixed. But it warned that the heavy lifting has yet to be done. Italy and Spain still have to apply for a programme. And the process of closer integration remains subject to political risks.

While the non-German press seemed mostly impressed, the Germans went on a verbal rampage.

Holger Stelzner writes in Frankfurter Allgemeine that the decision means a formal end of the separation between monetary and fiscal policy in Europe. The southern countries can now continue to amass at low interest rate, without having to worry about financial markets. The northern countries are also happy, not having to keep asking their parliaments for more money. He says the conditionality can never be applied in practice. Will the ECB stop buying bonds because Italy refuses to reforms its dismissal laws? He concludes with a reference to the German constitutional court, and wonders what the courts view on this policy will be?

Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.) He writes this is not a statement a central banker should make. This is for politicians. He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.

Note that these are Germany's two most important newspapers, straddling a wide ranging of public opinion from the right (FAZ) to the centre-left (SZ).

Interestingly, Bild Zeitung was relatively more moderate than the "serious" newspapers. Nicolas Blome dressed up his commentary in a pseudo-factual Q&A, in which he says that inflation will come, of course, but not immediately.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.)

Does Marc Beise really expect the ECB council to vote for its own dissolution?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

[...] He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive [...] He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.[...]

Increasing inflation should only work if the increase came unexpectedly and (irrationally) scared people away from bonds, as bond rates would adapt going forward, taking into account the higher inflation.

And as people (though not the markets) seem to expect higher future inflation already...

I'm not totally convinced that the long-maturity end of the bond market works that way (and I know for a fact that the short-maturity end does not).

In any event, it would denude the value of outstanding portfolios without precipitating cascading bankruptcies the way the alternative option for denuding the value of outstanding bond portfolios (which is to say default) would.

Because if you have liquid forward markets in bonds, then there's a set of arbitrage relations between the overnight rate, the expected volatility of the overnight rate, and the short-maturity end of the yield curve. And the CB fixes the overnight rate.

Empirically, this breaks down more and more the farther you go from the overnight rate, for various reasons that I will not pretend to fully understand (but which are presumably related to the absence of a consensus on long-term policy rate volatility coupled with credit constraints on potential arbitrageurs preventing the actual construction of the hypothetical tracking portfolios which could enforce the relationship). But it holds up quite well for the short-maturity end.

OK, re-reading that, it strikes me that I should probably break down the jargon a bit...

Basically, you can offer people a loan from today to tomorrow (where "tomorrow" means "a month to a quarter from now") at today's rate and from tomorrow to the day after tomorrow at the rate you think will obtain tomorrow, plus a payment for the risk that the rate you think will obtain tomorrow is not, in fact, the risk that turns out to actually obtain tomorrow.

If you know what the central bank is doing today (which you do, because the CB tells you) and you can predict the upper limit on how much it is going to change what it is doing tomorrow (which you can for small enough values of "tomorrow," because the CB makes changes in a gradual manner) then there exists an equation which will tell you what the arbitrage-free price of that risk you took on is.

But a loan from today to tomorrow and another loan from tomorrow to today (at a rate agreed upon today) is just a loan from today to the day after tomorrow. So they should have the same total interest cost.

Now repeat this entire setup to add a loan from the day after tomorrow to the day after the day after tomorrow.

Now, in principle you can do this for the whole yield curve, and it does hold very well for the short maturity end. But there are three places it can break down as you go further out the yield curve:

First, the equation that tells you what the fair markup of a forward rate is depends on knowing the boundaries of the variation in what the CB is going to do. You probably know that a month into the future. You might know it a year into the future. Five years? Not so much. Ten years? Fuggetaboutit.

Second, the equation that tells you the fair markup only holds if people are actually able to borrow and sell forward contracts that are overpriced and borrow cash to buy forward contracts that are underpriced. Now, if you were a loan officer at a major bank and some City puke came along and told you that he had spotted an opportunity for making free money, but it required that you let him borrow money for eight years, and that he was right about how much the central bank would change the interest rate during those eight years...

... then you'd tell him to go play on the highway.

So for the long maturity end of the yield curve the arbitrage-free price may not actually obtain, even if there is a consensus on what the volatility would likely be. Because people's credit lines are limited.

And third, even if the first arbitrage relation were in force (if nothing else then because every bond trader has read the same sort of books I have, and the only unpardonable sin for a bond trader is to fuck up while everyone else does not), the arbitrage relation between forwards and annuities may not hold. Because if you tell a banker that you've found an arbitrage opportunity between annuities and forwards, then he'll go "yeah, that's what Long Term Capital Management thought too," and tell you to go play on the highway.

(Incidentally, this is why I do not usually unpack the jargon until someone asks me to. I didn't even manage to get rid of all the financespeak in this one.)